Are you thinking about retiring soon? Here’s a checklist to help you decide if you’re ready.
As we reported earlier this week, many people are putting off retirement, for fear that they’ll not have enough money to support them through their later years. So, how do you know when you’re ready to retire? Well, if you’re even considering retirement, here are some of the points you should probably have covered before you take the big leap.
1. Make sure you have the money
It seems everyone is an expert when it comes to knowing how much money you'll need to live in retirement. While we've already busted the $1 million retirement myth, with ASFA standards working off skewed averages and the theory that, assuming you own your own home you can live off the Age Pension, there is a way you can test whether you're ready to retire.
First, track your spending. This includes noting down all expenses, including rent, utilities, food, fuel and entertainment. No expense should be overlooked.
Then set a budget and live off it for a month. After the first month, try cutting back on your expenses by 10 per cent. Then do this for another one month. There’s a general rule that you’ll need about 80 per cent of your pre-retirement income to live in retirement, so, if you can live off 70 per cent, you’ll have a better shot at saving and covering yourself for emergencies.
2. Educate yourself
One cardinal rule that is broken by many retirees is knowing about their finances and how they work. This doesn’t just mean knowing how much you can save and spend. It’s knowing about how to use tax breaks, concessions and investments to your advantage, so that you can save and earn on a limited income.
If you’re a YourLifeChoices’ subscriber, you’re on the right track. It also pays to read finance blogs or the money section of a newspaper. Keep an eye out for free, financial literacy courses, either online, at adult education facilities or your bank or other financial institution. You don’t need a degree in finance, but it will help you to make better decisions that could potentially save you a lot of money.
3. Learn all you can about super
Let’s face it: the superannuation system can be insanely confusing. Again, if you’re a YourLifeChoices subscriber, you’ll probably have a better idea than most about how the system works. But changes to super rules, confusion about how super is taxed, knowing the opportunities available to you to help you maximise your super, and just how long your super will last can still be difficult to track.
First things first: learn the terminology, then track down any missing super, consolidate your accounts – both bank and super – and check your insurance cover to see that you’re not paying money for unnecessary fees.
And, if you become savvy enough with super, you may even be able to manage your own super fund, saving you a lot of money over the years.
4. Be as debt-free as possible
Many baby boomers will enter retirement with some form of debt. Ideally, when making the decision to retire, you’ll do so with as little debt as possible. At the very least, it’s probably best to have paid off your mortgage, because retirees who don’t own their own home will have a tough time of it in retirement.
5. Reduce your dependants’ dependency on you
Ideally you’ll have no dependants, but if you do, ensure that they’re in a good financial position so that your money can stay in your pocket. Discuss their situation with your partner or, at the very least, ensure you factor in any expenses that may arise from them, such as helping them with a home deposit, or paying for your grandchildren’s education. Figure out how far you’re willing to support them and ensure that you have the money to do so.
6. Ensure that you have affordable insurance
Make sure that you have decent affordable insurance. This includes, health, car, home and contents insurance. Allow for a 10 per cent increase in costs each year.
7. Account for worst-case scenarios
It’s a long shot, but what if your home is swept away by floods or a freak hailstorm punches baseball-sized holes in the roof of your car? If your insurance doesn’t cover such events, you could be in trouble. Make sure your house is in good condition too. Home maintenance is often a cost not accounted for by many retirees. Try to have a rainy-day fund or emergency fund set aside for any of these scenarios. You’ll thank yourself for it later.
8. Have another source of income
Sounds easy, right? If you have a second home, you can rely on rent payments to provide you with extra retirement income. You could invest in a small business, or become an online seller. Are you handy on the tools? Or a better-than-average seamstress, artist, or crafty type? Do you have a green thumb? These are all skills that could bring you extra income in retirement. If you learn the rules and play the system, you can earn a little extra and make your retirement more comfortable.
Do you have any advice for anyone thinking about retiring soon?
Article updated on 9 December 2019.
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